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Gold, Stocks See Change Of Fortune In 2014 -- Will It Last?

(Kitco News) - 2014 brought a role reversal of sorts for gold and equities, with the metal higher and stocks lower, in contrast to last year’s performance.

With January drawing to a close, can gold hold its gains and will equities continue to fall? Technical charts may offer some clues, analysts said.

As of 1:20 p.m. EST, gold for April delivery was $18.60 lower to $1,243.60 per ounce on the Comex division of the New York Mercantile Exchange

“Gold is returning to its historic role as a safe haven as we’re seen problems globally,” said Darin Newsom, senior analyst at Telvent DTN. “Equities really needed a correction, they’ve been way overvalued. A lot of technical charts show they’re way overbought.”

Concerns about weakness in China’s economy and the selloff in emerging-market currencies are the fundamental reasons behind the recent rebound in gold and the break in equities, analysts said, with Newsom adding this inverse relationship between gold and stocks is common historically.

Newsom said he believes this diversion has more room to run, at least in the short term.

On the weekly April gold futures chart, Newsom said the market has room to run higher, with the first level of resistance at $1,310, then $1,350.

While gold may run higher, equities could continue to crumble. Newsom said based on Dow Theory, a type of technical analysis, the Dow Jones Industrial Average could be in for quite a fall if the market is truly reversing. “If we’re in a reversal, we could see a retreat all the way to 13,220. That’s a long way to go,” he said.

But Newsom isn’t that bearish. “There’s a lot of technical-chart support (in) between…. I could see a fall to 14,500 to 14,800 being more realistic,” he said.

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The end of January is significant for both gold and equities. The Commodity Traders’ Almanac says based on seasonal cycles, gold has a tendency to peak in late January/early February when jewelry demand starts to fall.

For equities, the Stock Traders’ Almanac says since 1950 that every January the Standard & Poor’s 500 closed lower, it “preceded a new or extended bear market, a flat market or a 10% correction.”

Brian LaRose, technical analyst at United-ICAPICAP, said the short- and medium-term trend in the S&P 500 is lower. “The last three back-tests of the 100(-day moving average) resulted in new highs. (For Thursday) the 100(-day moving average) cuts at 1762. With both the short- and medium-term technicals showing a bearish bias, the bulls are going to need a miracle to get a reversal here. Fail to reverse and a dump to 1680 becomes possible. Peg 1744-1736 as our only intermediate candidate for support,” LaRose said.

An Alternative View

Dave Toth, director of technical research at R.J. O’Brien & Associates, agreed the short-term trend is lower for S&Ps, but for the long term, the uptrend remains dominant. It won’t be until S&Ps fall under 1754 would he change his view on the long-term trend.

If that were to happen, he said long-term traders should take a neutral position on S&P, saying a larger correction could happen. Conversely, if S&Ps get back above 1801, this would alter the short-term bearish outlook, he said.

Toth is not impressed with the recent strength in gold. “There’s good risk/reward potential in a sale here,” he said.

It’s not just charts that he cites. Toth said silver is lagging gold, which is a negative sign for further gold strength. Additionally the euro weakness may also weigh on the yellow metal.

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